Circulation before Passage of Resolution
From time to time, companies need a timely reminder of basic legal principles of company law. A recent case involving a deadlocked board of directors concerned the essential elements involved when agreeing and purporting to pass written resolutions1.
The fundamental principle clarified by the court is that private company shareholder written resolutions are invalid unless they have been circulated on the board’s authority.
What’s the background?
Agreeing decisions by way of written resolutions are common among shareholders, instead of calling a formal shareholders’ meeting to make decisions. For obvious reasons, it’s often far more expedient to do this and is entirely lawful for private companies - if company law is followed in the process of doing so.
One of the legal requirement is that the board of directors can choose whether it circulates the written resolution to the shareholders for approval; but if the board receives written notice from shareholders representing 5 per cent of more of the total voting rights (or a lower percentage if stated in the company’s articles) requiring it to circulate the written resolution, the board must do so.
This case involved a deadlocked board. There were three shareholders two of which were also directors. One of the directors (A) proposed appointing the non-director shareholder (C) as a director and proposed doing so by way of written resolution. A and C were the majority shareholders and could pass the resolution without B’s consent, however, A sent an email to the other director (B) calling a board meeting with just an hour’s notice with the intention to authorise the circulation of the written resolution to shareholders for their approval.
B said this was insufficient notice, refused to attend the meeting and said any resolution passed at the meeting would not have her approval; but the others signed it anyway and a copy was sent to her.
The High Court ruled in favour of B and declared the appointment to be invalid, which rendered the resolution (appointing administrators) to be invalid. The Companies Act required circulation of the resolution to all members by the board. Circulation by one director – and after it had been passed – was insufficient.
It also said that though a written resolution could still be effective even if it was not circulated to all the shareholders, this only applied in the case of an inadvertent omission. In this case, it was deliberate.
What does this mean?
If a company intends to rely on written resolutions to agree and make shareholder decisions rather than holding a formal meeting to do so, they must ensure resolutions are both approved and circulated by the board, and sent on its behalf to all shareholders entitled to vote on the decision – before its passage.
If this is not done, it will be invalid. Compliance with the procedural rules is essential and expert advice should be taken if there is any doubt as to what is required for resolutions to be legally effective.
1 Re Sprout Land Holdings Ltd (in administration) [2019] EWHC 806 (unreported)
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